Establishing Clearer Rules for Foreign Direct InvestmentARTICLE

By Karen Lynch

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World business leaders are urging global policymakers to help boost cross-border investment with a clearer, more coherent set of rules. Their calls follow a double-digit drop in foreign direct investment (FDI) in 2016 and reflect the uncertain outlook for 2017.1 The business leaders aim to revitalize multilateral efforts to address the issue during the World Trade Organization’s (WTO’s) 11th Ministerial Conference in December 2017.2,3

Businesses with global supply chains and customers can face various impediments to investing their capital overseas, including market factors as well as domestic and international policy.

The decision to enter or expand in any given country is typically influenced by business considerations such as market size, infrastructure, labor, integration with neighboring countries or proximity to corporate headquarters.4

But policy considerations also play a major role. Regulatory obstacles may include foreign equity limitations, screening or approval mechanisms, employment restrictions, opaque regulations, corruption, weak contract enforcement, poor intellectual property (IP) protection, localization requirements, and limitations on capital repatriation, land ownership, and other operational matters. Other policy-related factors may help to attract overseas investment, including political stability, investment incentives, access to resources, and manageable business registration procedures.5,6

Today, with some governments seeking to protect national industry and employment more vigorously, “investment protectionism” may aggravate regulatory issues, according to a report from the Organization for Economic Co-operation and Development (OECD). “Investment protectionism can take many forms: new rules or more rigorous enforcement of existing ones; greater conditionality attached to regulatory approval mechanisms; or a more expansive notion of strategic industries, the national interest and national security,” the report states.7

Business Groups Seek FDI Clarity

Political risks have risen in importance, according to the 2017 Foreign Direct Investment Confidence Index published by A.T. Kearney, a management consulting firm. “Governance and regulatory issues account for the top three factors – as well as seven of the top 10 – in terms of factors that determine which markets appeal to investors,” the report said. This contrasts with last year’s results, in which market and infrastructure factors predominated.8

Accordingly, business groups are arguing for clearer rules to facilitate FDI. “There is a strong economic case to be made for both improving market access for investment and the protection of investments,” according to a March 2017 report from the International Chamber of Commerce (ICC).9 The ICC’s call has been echoed by other groups, including the B20, a business lobby to the G20, and the Institute of International Finance, a global financial industry lobby. “Consistent international standards are vital to underpin the efficient flow of capital to investment opportunities,” the IIF wrote in an April 2017 letter to the International Monetary Fund (IMF) and the World Bank.10

Companies have, in turn, shifted their emphasis more toward joint ventures (JVs) with local businesses as well as mergers and acquisitions (M&As) in 2017, compared to last year’s more diversified strategies, A.T. Kearney says. “With nationalism and protectionism on the rise, JVs are likely to be viewed most favorably by governments that are keen on boosting domestic production and employment,” according to the consulting firm. In addition, “while M&As imply greater ownership and control by a foreign company, the resulting enterprise could retain its historical branding and thus could continue to seem more local than foreign."11

Advancing Global FDI Policy

The multilateral forums that establish FDI guidelines, such as the G20, United Nations Conference on Trade and Development (UNCTAD) and WTO, have expressed interest in further facilitating foreign investment.12,13,14 FDI has risen on the agenda after the ratification of a global trade facilitation agreement in early 2017 to expedite the movement, release and clearance of goods across borders. Some business groups see this trade facilitation agreement as a potential model for an investment facilitation agreement, since many elements common in trade facilitation could also apply to investment facilitation, such as cross-border coordination and collaboration among multiple investment promotion agencies.15

The ICC, B20 and other organizations have been advising the WTO and calling for specific short- to medium-term measures to facilitate FDI. These include initiating a global dialogue, establishing global principles on investment policymaking, drafting a standard dispute resolution model, and adopting an action plan aimed at improving transparency, information sharing and administrative procedures.16

For example, according to World Bank officials, the establishment of uniform principles could mean that all companies would be subject to the same rules for opening a local subsidiary, based on company size, legal form or commercial activity, but not nationality. They add that clear and transparent rules, less bureaucracy and more supportive institutions would enable efficient transactions and provide investors with added security.17

The WTO’s December 11th Ministerial Conference has become the focal point of many of these aspirations. “At the minimum, a good outcome at MC11 would be an agreement to restart discussions in this area with an exploratory agenda,” the ICC said.18

The Takeaway

Businesses are eager for clearer international standards that facilitate FDI, and the multilateral organizations that set these guidelines are moving in the same direction. The focus is now on a December 2017 WTO meeting, at which business groups hope for an exploration of potential new rules for foreign direct investment.

The Author

Karen Lynch

Karen Lynch is a journalist who has covered global business, technology and policy in New York, Paris and Washington, DC, for more than 30 years. Karen also is a principal at Content Marketing Partners.

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